OFT set to tackle £2bn penalty fees

Banks sting their customers with late payment charges and fees totalling £2bn a year, according to a report this week. The figure accounts for almost a quarter of retail profits by Britain's major banks, writes Phillip Inman.

But a ruling expected in the next two months could cut the bill by two-thirds and prevent thousands of people from sliding into crippling debt.

Investment bank Credit Suisse First Boston said the £2bn figure is the most accurate estimate so far of bank revenues from penalty charges. It said the banks are anxiously awaiting a report by the Office of Fair Trading that could cut deep into their profits.

The OFT has focused on allegations of profiteering by credit card companies that routinely levy £25 default charges, but it is widely believed that a hard-hitting report will also force banks to slash late payment charges on current accounts.

Six banks - Barclays, HSBC, Halifax, Lloyds TSB, Alliance & Leicester and Royal Bank of Scotland/NatWest - hold 97% of all current accounts. The same banks account for 72% of all credit cards issued in Britain.

Over the past two years banks have pushed through increases in penalty charges. The report identifies Lloyds TSB and Halifax as the main culprits. Their charges rose 11% last year. A bounced cheque costs almost £40 at Halifax and Royal Bank of Scotland, while at Lloyds TSB and Barclays customers pay £35.

The report's authors said: "In an increasingly automated world, it can be difficult to comprehend the charges levied by the banks. It is also hard to fathom why, if charges reflect costs, they have increased so sharply over the past couple of years with arguably increased automation."

It is believed the OFT will propose a cut in charges to a maximum £15 when it reports in early April. There will almost certainly be a ceiling after both the chief executive of the Banking Code and officials at the OFT said charges may be too high. The OFT said in July 2005: "The levels of default charges imposed by credit card companies need to be reduced in order to be fair."

However, campaigners will be disappointed if the cap is set at £15. They argue that automation has almost wiped out all costs apart from postage. They also point out that banks will often impose the charges over several days, especially on current accounts, giving rise to bills in excess of £100 for one missed payment.

A spokesman for bankactiongroup. co.uk said the OFT needed to take tough action or risk more people needlessly suffering terrible debts.